19 Jul 2017

Explaining Current and Capital Accounts to Scott Sumner

Trade 22 Comments

(If that title sounds hostile and/or presumptuous, it’s only because I sat here for about 3 minutes trying to think of something funny.)

Over at TheMoneyIllusion, Scott first quotes from a news story:

The National Association of Realtors released a report Tuesday that said foreign buyers and recent immigrants spent an estimated $153 billion on American properties in the year ending March 2017. That was a 49% increase over the previous year and the highest level since record-keeping began in 2009.

The purchases accounted for 10% of the total value of existing home sales in the U.S. The report did not include new homes.

The breakdown of sales between foreigners and recent immigrants was about 50:50.

Then Scott writes:

Of course the sale of homes to immigrants is not an export, but it does have a similar economic impact.  However the sale of homes to foreigners does represent a US export, and creates lots of goods jobs for American blue collar workers.  (Note that it doesn’t really matter whether they buy new or existing homes; the net effect on the housing market is the same.)  So the protectionists should be rejoicing, right?

Actually, just the opposite.  The US government does not even count these as exports.  Instead they are treated the same as net borrowing.  They are considered a part of America’s current account deficit, leading to all sorts of silly hand-wringing about how America is borrowing too much and living beyond our means.  

I wrote in the comments:


If you think selling a house sitting on U.S. land to a foreign buyer is the same thing as exporting a car (of comparable market value), would you be OK if the IRS treats the revenue from your Boston house sale the same as a bonus check from Bentley? I mean, in both cases you’re selling something for money, so they’re both “exports” from Scott Sumner, right?

(I am referring to Scott’s other post where he says he is moving from Boston to somewhere in California.)

In case my smug comment is too opaque for you, try this:

SCENARIO #1: Your teenage son tells you, “I bought $20 worth of materials at Home Depot and made a bed that I sold to the neighbor for $100. I made $80 profit, woo hoo!”

SCENARIO #2: Your teenage son tells you, “I bought $20 worth of materials at Home depot and made a bed that I sold to the neighbor for $100. I also sold him my bedroom for an additional $200. So now I have to sleep in the family room on the couch, FYI. But at least I made $280 of profit, woo hoo!”

Admittedly, Scott doesn’t believe that “income” is a meaningful concept in economics, so I don’t expect him to be troubled by my zingers. However, some of you may see my point when I have been arguing these last few years that sometimes Scott and Don Boudreaux are a tad too glib when they go after Trumpistas.

UPDATE: Ryan Murphy knocks me on my heels on Twitter regarding this. The whole thing is subtle.

22 Responses to “Explaining Current and Capital Accounts to Scott Sumner”

  1. Capt. J Parker says:

    Way too subtle for me Dr. Murphy. Is your only beef with Dr. Sumner that he doesn’t seem to know what transactions belong on a Profit and Loss statement at what transactions belong on a Balance Sheet? I thought that in the past you hinted that you had misgivings about Americans selling their capital stock to finance consumption even if opposing such actions runs counter to libertarian ideals of strong property rights and free flow of capital? The latter is the more interesting issue to me and I confess to not knowing if it is in fact a “problem” in need of a “solution.”

  2. AD says:

    Yeah, I still don’t get it.

  3. Bob Murphy says:

    Quick version:

    Right now, the way the government compiles the statistics, if an American sells his $300,000 house to a Japanese buyer, that is treated as a reduction in US assets.

    Scott Sumner is saying he thinks it should be counted as an export, the same as if a US car company shipped $300,000 worth of newly produced cars made in Detroit, over to Japan.

    So I am pointing out why no, Scott’s recommendation doesn’t make sense.

    • Transformer says:

      Say I have an old house worth $300,000 and make a car worth $300,000.

      I have $600,000 worth of stuff.

      1) I sell the car I made and buy 300,000 of consumer goods (that I consume)
      2) I sell the house I own and buy 300,000 of consumer goods ((that I consume)

      I decide between 1 and 2 based on which gives me grater utility. At the end of the year in both cased I have $300,000 worth of stuff and have consumed $300,000 of other stuff.

      What difference should it make from an accounting perspective which I chose to do ?

      • Bob Murphy says:

        You’re taking the two scenarios and putting them together, which isn’t what’s happening here.

        Instead you should say:

        A) I sell an old house for $300,000 and then consume $300,000 worth of stuff.


        B) I produce cars worth $300,000 during the year, sell them, and consume $300,000 worth of stuff.

        So what difference does it make from an accounting perspective which I do? And yet these bean counters will say I had $0 in net income in A) but $300,000 in net income in B. They will also say my assets went down in A) but not in B). What weirdos.

        • Transformer says:

          The bean counters would be right to say that.

          But I think implicit in Scott’s argument is the idea that the old houses that are being sold to foreigners are being replaced by new houses (he says ‘Note that it doesn’t really matter whether they buy new or existing homes; the net effect on the housing market is the same.’)

          So I took his argument to be a bit like mine would be if you replaced “make a car worth $300,000.” with ” build a new house worth $300,000.”

          • Bob Murphy says:

            There are several moving parts in all of this.

            Scott is thinking, “If what we want to do is stimulate employment / job growth for US construction workers, then I do the same thing whether I today spend $300,000 on a house built in 2015 or a house built in 2017.”

            But what he actually concluded was (I’m of course paraphrasing in both ‘quotes’): “The trade statistics should treat the sale of a $300,000 house the same as the export of $300,000 of cars.”

            That is all mixed up. For one thing, the house built in 2015 was already counted in 2015 GDP as residential investment, so you certainly can’t count it as an export in 2017 GDP.

            But beyond that, the “$300,000 house” actually includes the land. It’s not just the physical house.

            • Transformer says:

              To ask a clarifying question:

              If Scott had been talking about new houses (and assuming that land values were a minimal part of their cost) would you have had more sympathy for his argument ?

              • Bob Murphy says:

                Yes. I probably wasn’t clear enough in my original zinger, but my Home Depot analogy I hope would have helped.

              • Bob Murphy says:

                But, I am not sure how the trade stats handle that. I am guessing the house ends up in GDP somehow, so I think Scott is still a bit off (or at least misleading). I think if they merely did his recommendation of counting it in exports then it would be double counted that year.

        • Craw says:

          Is Bob endorsing the Labor Theory of Value?

          • Tel says:

            Are you talking about an individual theory of value, which says that my lifespan is strictly limited and of value to me, and thus the cost to me of any good or service is the time I spend working for that?

            Or are you talking about a Marxist global theory of value whereby we work from the presumption that every individual must necessarily have the same capabilities?

            • Bob Murphy says:

              No Tel, he is pretending that I’m writing as if the thing I sell only has value because I labored on it. I.e. “Bob says if the guy makes a car and sells it for $300,000 then it’s an export / net income, but if he doesn’t build a house this year yet sells it for $300,000, then it’s not an export / net income. So it sure looks like he’s saying you need to mix your labor to give something value.”

              Of course, that’s totally wrong because in both cases, you sell the thing for $300,000.

              The issue with the accounting is that your income = how much you can consume in a time period without reducing the value of your capital stock. If you were walking in the woods and stumbled on a $300,000 car that you claimed, then sold to a foreigner, that would be net income / export.

              • Ken P says:

                Thanks Bob, that made it a lot clearer.

                Stumbled on gets rid of any assumption of labor yet there is an increase in total assets once found, because the car in the forest does not exist until stumbled upon.

              • Tel says:

                Yeah OK, before I give a sensible reply… if you ever do ever go walking in the woods and just happen across an exceptionally nice $100k+ vehicle that someone has apparently abandoned in such an out of the way place, for no reason, please promise me you will at least think about the type of reasons why that might happen, and also think about the type of people you might be dealing with if you mess with that car. It’s not that I want to take your decisions away from you, just want to ensure you don’t accidentally overlook the obvious and presume everyone is a pacifist or something dangerously silly like that.

                Getting back on topic… well the “Labour Theory of Value” (when used in the global sense) is one of those long-run theories based on the axiom that the entire system has settled and this includes a presumption that everyone knows all the ways to gain income, and everyone is already doing their best.

                A one-off discovery of wealth is fundamentally incompatible with the starting axiom of a long-run theory that has reached a stable state. I think there’s a category error happening here.

                If there was some reliable fixed probability that people walking in the woods always resulted in occasional windfall gain, then exactly that number of people would devote time to walking and collecting this gain as would balance out all other professions those people might indulge in. On average the “Labour Theory of Value” would apply, although in any specific the short term period there would be noise in as much as any given windfall gain might put one person ahead of the others. That gradually diminishes thanks to the Central Limit Theorem.

                Yeah, I know, someone is going to give me an example of a probability distribution where the Central Limit Theorem won’t converge… let’s presume that never happens.

        • Mike says:


          I realize I’m a bit late to the party but I wanted to clarify something you said about the accounting perspective.

          In your two examples, (selling an old house vs. selling cars you produced) they actually both affect your net income in the same way. It’s true that in the case of selling cars, you would consider the proceeds to be “revenue,” but you would still need to subtract out cost of goods sold (which is going to be the same amount as your inventory, an asset), to get the effect on your net income. So, say the inventory cost is $200,000, and the sales revenue is $300,000, that’s contributing $100,000 to your net income.

          Likewise, if I sell a house with a book value for $200,000 for $300,000, I would have a gain of $100,000 that would be added to my net income. In both cases, what’s added to my net income are sales proceeds minus the book value of my asset, and in both cases my assets are decreasing (inventory in case B). The only reason for the ostensibly different accounting “treatments” are for purposes of clarity and disclosure, but they’re conceptually the same.

  4. Craw says:

    Jay Leno sells a 1923 Bugatti to a Japanese businessman, who stores it in Jay Leno’s garage. Explain.

  5. Bitter Clinger says:

    Dr. Murphy, I am with Capt Parker and AD in that I haven’t a clue of what point you are trying to make. It is not your fault, I didn’t understand about the savages and their cheating wives till you explained it either. I assume this has something to do with this Wikipedia article on the net worth of the US.


    “The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP)[a] as of Q1 2014.” My question is why the debts are not considered assets? I own tax-free municipal bonds, which are debt to the people who issue them, but on my balance sheet they show as an asset. Is this $145 TRILLION foreign debt? Later in the article it states that the US owes more to foreign countries than they owe to us but we own more of their assets than they own of ours to leave a net positive to the US. (if I read that correctly?) Maybe at some point (a podcast?) you can try to explain what is going on. Thank You.
    The best part of the article (though off topic) was about the financial sector in the US.
    Interest payments on debt by US households, businesses, governments, and nonprofits totaled $3.29 trillion in 2008. The financial sector paid an additional $178.6 billion in interest on deposits.[14] Fifty years ago I should have studied banking, not engineering.

    • Bob Murphy says:

      BC I will try to do a post on this later, but I’m swamped right now. If I don’t and you still care, feel free to remind me in a couple of weeks (really).

      In the meantime, you need to remind me what this was about because it sounds way more interesting than trade accounting: “It is not your fault, I didn’t understand about the savages and their cheating wives till you explained it either.”

  6. RPLong says:

    Bob, as time goes on, you seem to get better at subtlety and more brilliant at economics. Unfortunately, my own economics knowledge has stayed the same as what it was when I first started reading your work. So now I have some studying to do. Thanks for the inspiration.

    • Bob Murphy says:

      Thanks. I can’t do it right now but I’ll post a better explanation when I’m back in my office in August.

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